NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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IQ, Expectations, and Choice

Francesco D’Acunto, Daniel Hoang, Maritta Paloviita, Michael Weber

NBER Working Paper No. 25496
Issued in January 2019, Revised in September 2019
NBER Program(s):Program on the Economics of Aging, Asset Pricing Program, Corporate Finance Program, Economics of Education Program, Economic Fluctuations and Growth Program, Labor Studies Program, The Monetary Economics Program

Forecast errors for inflation decline monotonically with both verbal and quantitative IQ in a large and representative male population. Within individuals, inflation expectations and perceptions are autocorrelated only for men above the median by IQ (high-IQ men). High-IQ men's forecast revisions are consistent with the diagnostic-expectations framework, whereas anything goes for low-IQ men. Education levels, income, socioeconomic status, or financial constraints do not explain these results. Using ad-hoc tasks in a controlled environment, we investigate the channels behind these results. Low-IQ individuals' knowledge of the concept of inflation is low; they associate inflation with concrete goods and services instead of abstract economic concepts, and are less capable of forecasting mean-reverting processes. Differences in expectations formation by IQ feed into choice—only high-IQ men plan to spend more when expecting higher inflation as the consumer Euler equation prescribes. Our results have implications for heterogeneous-beliefs models of consumption, saving, and investment.

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Document Object Identifier (DOI): 10.3386/w25496

 
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